How Much of a Pharma Company’s Pipeline Should be In-Licensed?

I was asked this question last week and I casually answered that a pharmaceutical company should generate about 33% of its pipeline through outside sources (in-licensing). Actually, I didn’t pull this number out of the blue. Rather, it is derived from some observations and beliefs that have been generated over the past 30 years.

Why in-license anything at all?

1) No matter how big your R&D organization is, no matter how capable it is, and no matter how smart your scientists are, it is impossible for one organization to corner the market on all the good ideas that are being worked on across the world. You WILL miss opportunities. To avoid missing out, it is important to be able to have the capacity to add such programs if they become available. Some years ago, when novel anti-ulcer drugs like Zantac were in late development, Merck realized that these compounds would be important new medicines. As it didn’t have its own internal program, it licensed two important anti-ulcer medications: Pepcid (famotidine) and Prilosec (omeprazole). In fact, in the case of the latter, Merck did state of the art toxicology studies to help get this compound approved, thereby showing the added value that can be delivered by a partner with a strong R&D capability.

2) You may have recognized that a potential new breakthrough existed in a hot therapeutic area, but despite committing a good deal of time and effort, your own internal efforts failed. If having a new medicine in this area makes strategic sense for your company, it would behoove you to try to license a promising agent from a company looking for a partner. This is what happened when Warner-Lambert Parke-Davis signed a co-marketing agreement with Pfizer for Lipitor. The result proved historic.

3) Perhaps your own internal program has had some success and your compound is looking good in mid-stage clinical trials. However, a competitor’s compound is 1 – 2 years ahead of your own. Furthermore, your own compound looks pretty similar in terms of its clinical profile to the competitor’s. It might make business sense for the two companies to link-up both programs in such a way that one is the lead and the second one serves as a back-up. Why would the lead company do such a deal? For one thing, should a problem crop up with the lead compound, you now have an alternative. In addition, the deal can be constructed in such a way that expensive clinical trial costs are shared. In addition, you would now have two shots in this arena instead of one. This was the situation when BMS sought a partner for its anti-clotting agent, apixaban. While Pfizer had its own compound in development, apixaban was at least 12 months ahead and the Pfizer compound didn’t have any apparent advantages. Joining forces maximized the use of resources for both companies.

This all sounds pretty good. Why not in-license 50 – 60% or more of your pipeline?

1) This is sort of like being dependent on foreign oil. Your pipeline is your life blood, your future. To depend on outsiders to supply it for you is a mistake. For one thing, you are never assured that what you need will be out there. Furthermore, you can’t be guaranteed that you won’t be outbid by someone else for what you want.

2) If you in-license a compound that makes it to market, in the best case you are paying a significant royalty. In the worst case, you are getting only 30 – 40% of sales. Clearly, you don’t get as significant a return on investment for an in-licensed compound than one generated internally.

3) Most importantly, you need a significant in-house R&D group to be able to not just help evaluate potential in-licensed compounds, but also to be viewed by a prospective partner as an organization that will bring added value to its discovery.

One might argue with the 33% figure. Maybe it should be 30%. Maybe it should be 45%. The bottom-line is that it should be a significant part of one’s strategy. But it shouldn’t be the majority. The pipeline is a company’s lifeblood and internal R&D must drive it.

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[…] sense is that this is a goal shared by a majority of pharmaceutical companies, and, as I’ve previously written on my blog, I support this strategy. But should a company like Pfizer be totally dependent on outside […]

[…] My sense is that this is a goal shared by a majority of pharmaceutical companies, and, as I’ve previously written on my blog, I support this strategy. But should a company like Pfizer be totally dependent on outside […]